Around 145 million Americans own cryptocurrencies. In India alone, 75 lakh people have made crypto a part of their portfolio. If you compare similar data from last year, you would realise the wave of investors that have joined the cryptocurrency market recently. Not just that, there is also a growing interest among non-crypto investors to join the bandwagon.
But why are people rushing to invest in cryptocurrency? There could be multiple reasons.
Why Should You Invest In Cryptocurrency?
That being said, should you be investing in crypto? Well, that’s for you to decide, but we can help you arrive at that decision by stating some facts.
1. It is an emerging market –
In 2020, the total crypto market size was around $1.49 billion, and as of June 2022, it is valued nearly at $1trillion. This exponential growth opportunity is one of the reasons why emerging markets like crypto might appear to be a great investment. You would not see the same kind of growth in established markets like equities.
Another factor that sets cryptos apart is that they level the playing field for everyone. For instance, investing in overseas equity and real estate markets is still quite troublesome. Whereas the crypto market is one global market for anyone from anywhere in the world to invest in.
2. It is high risk but high reward too-
Cryptocurrencies are volatile. Volatility refers to the ability of any asset to move up or down in a short period. This makes it a high-risk – high reward asset; you will often hear cryptocurrencies going up or down by double and sometimes triple digits in a day.
So while investing in crypto may mean losing 10-12% of your capital in a day, there is also an opportunity for you to make equal if not more returns, provided you research before investing. However, there are various ways to combat volatility, like diversifying your portfolio. Or, if you are a risk-averse investor, you can place your investments in only bluechip cryptocurrencies as they are relatively stable.
3. Active involvement, not passive –
Stock investments are not active. Investing in a company’s stock does not give you the freedom to change the working of an organisation if you aren’t in alignment. Whereas crypto investors can introduce changes to how a project works.
For instance, if you buy a stock of Amazon and don’t like its website’s user experience, you can’t do anything about it. Whereas if this was the case with a crypto project and you are a token holder, you can redesign the experience and send it to developers to patch it.
4. Large scale institutional adoption –
In 2021, $9.3 billion of institutional money flowed into the crypto market. In 2020, the same number was $6.8 billion.
Institutions like MicroStrategy, Grayscale, Blackrock and more added cryptocurrencies to their balance sheets. Tesla holds around 40,000 BTC on their balance sheet, besides Elon Musk also holds a significant investment in cryptocurrency. Tesla and now SpaceX also enabled people to transact using dogecoin. Paypal enabled crypto payments and more.
Such strong institutional backing indicates trust in the growth of the sector. This might be a good factor to consider before investing in cryptocurrencies.
5. Invest in future companies –
Some of the biggest tech companies today are built on web 2.0, and there is a belief that the next generation of companies will come from web 3.0.
Web 1.0 was when the internet was just introduced; there were very basic functionalities. It was just a repository of web pages with only a few people having the ability to add information. Then it evolved into its read-and-write version, the age of social media. Everybody now can put out content. And now, we are moving towards the third version of the internet, the read, write and own web. In web 3.0, people won’t just consume and create content but own it.
If you have watched The Social Dilemma, you would understand how powerful big tech companies have grown. They have become data hoarders with the ability to influence attitudes and behaviours of people, groups and institutions. Web 3.0 is working towards eliminating this data monopoly through decentralisation which is why people are bullish on web 3.0, where the next wave of internet companies will come from.
6. Fractional ownership –
1 BTC = $21,700
Don’t have the money to buy a whole Bitcoin, don’t worry. You can buy the smallest unit of a Bitcoin (0.00000001 BTC). Whereas in stocks, this might be difficult. More often than not, you have to buy a whole stock. Fractional ownership reduces the barrier to entry in crypto markets, allowing people to start investing with minimum amounts.
How To Invest In Cryptocurrency? Trading Vs Investing
By now, it must be evident why cryptocurrency might be a lucrative investment. But what’s the right way to do it? Generally, there are only two ways people invest in the crypto markets – Trading or Investing.
To put it simply –
Trading is when you frequently buy and sell to make returns from market volatility. Investing is when you stay invested for a long run and try to reduce the impact of market volatility and profit from the growth of the underlying asset.
Coming to the important question, should you trade cryptocurrencies? Trading is a skill; it takes a lot of effort and knowledge to make trading decisions. Not everybody can trade; 90% of people lose money with trading.
But if you think you have the time and skill required to be a good trader, go for it.
However, if you are someone who passively wants to build wealth and neither have the time nor the inclination to learn and practice trading, Investing is for you. You can set up a SIP in some good cryptocurrencies and regularly invest in them.
Risk Management in Cryptocurrencies
A big part of investing is risk management. Below are a few things that you should keep in mind to mitigate risk with your crypto investments.
1. Don’t go all-in on crypto –
If the only investment that you have are in cryptocurrencies, then you might want to consider diversifying into different asset classes. It will help you mitigate risks. Cryptocurrencies should be a part of your larger portfolio, not your entire portfolio. Within cryptocurrencies also, you must diversify among different cryptocurrencies. The diversification can be based on the market cap of cryptocurrencies or the themes they belong to, for instance, Metaverse, NFT etc. You can explore diversification within cryptocurrencies through Coin Sets.
2. Say no to FOMO –
Often investors take hasty decisions during extreme market conditions because of the Fear Of Missing Out (FOMO). If a cryptocurrency is rallying and everybody is buying into it, you might feel FOMO and do the same. However, make sure all your investment decisions are thought through. Likewise, don’t dump all your cryptos with slight market downturns. If you believe in your investments, then hold on to them.
3. Calculated risk, always –
Risk management doesn’t imply that you don’t take any risks at all. However, be mindful of the risks you take. Invest in riskier crypto projects but don’t invest much.
Congratulations! You have read everything you need to know before starting your crypto journey. May your investments rise and shine, always.